Looking at Service
Contract 38 and its implementation, government has practically become
'powerless' over Malampaya, and is therefore not in the position to ensure
that Malampaya serves the national interest.

By
Arnold Padilla

IBON FEATURES

Posted by
Bulatlat

The US$4.5-billion Malampaya Deepwater Gas
to Power Project in Palawan (an
island some 590 kms from Manila) is
supposed to reduce the country's overdependence on imported crude oil and
refined petroleum products for its energy needs.

With the continuing climb of global oil
prices since last year, the strategic importance of Malampaya and other
exploration efforts to look for domestic energy sources has become more
prominent.

But what is seldom discussed is that
foreign oil companies and not the national government has effective
control over Malampaya, raising serious doubts on whether the project
could indeed provide the energy security of the country.

Foreign giants

Malampaya is covered by Service Contract
(SC) 38 between the Philippine government as represented by the Department
of Energy (DOE) and a consortium of service contractors composed of SPEX
(45%), Chevron Texaco (45%), and the Philippine National Oil
Company-Exploration Corporation (PNOC-EC, 10%).

SPEX is the exploration unit in the
Philippines of Royal Dutch Shell, a transnational corporation (TNC) based
in the United Kingdom and The Netherlands. Royal Dutch Shell is the
world's third largest oil firm in terms of revenues and the second most
profitable company. American TNC Chevron Texaco, on the other hand, is the
world's fifth largest oil company in terms of revenues and the fourth most
profitable.

Under the Service Contract arrangement, it
is assumed that the government (through the DOE) retains ownership over
the petroleum reserves of Malampaya, even as it hired the services of SPEX,
Chevron Texaco, and state-owned PNOC-EC as contractors for the
exploration, development, and utilization of Malampaya natural gas.

The Service Contract system took effect in
1973 with the enactment of Presidential Decree 87 or the Oil Exploration
and Development Act of 1972 under the Marcos administration (1965-1986).
This system is perceived as consistent with Article XII (National Economy
and Patrimony) Section 2 of the 1987 Constitution which says that all
natural resources in the Philippines including petroleum are owned by the
State.

The Supreme Court, in its Dec. 1, 2004
decision declaring the constitutionality of Republic Act (RA) 7942 or the
Philippine Mining Act of 1995 held the view that the contentious Financial
and Technical Assistance Agreement (FTAA) is essentially a Service
Contract, which Article XII Section 2 paragraph 4 of the 1987 Constitution
supposedly allows. This provision says that, "The President may enter
into agreements with foreign-owned corporations involving either technical
or financial assistance for large-scale exploration, development, and
utilization of minerals, petroleum, and other mineral oils according to
the general terms and conditions provided by law…"

Effective control

But even the Supreme Court's decision did
not resolve the issue of effective State control over the country's
natural resources as far as the Service Contract system is concerned.

Paragraph one of Article XII Section 2 of
the 1987 Constitution explicitly asserts that "The exploration,
development, and utilization of natural resources shall be under the full
control and supervision of the State."

The term control is generally defined as
the power to direct or determine, or the exercise of authoritative power.
Looking at SC 38 and its implementation, the government has practically
become 'powerless' over Malampaya and therefore is not in the position to
ensure that Malampaya serves the national interest.

To illustrate, instead of requiring that
all the petroleum produced from Malampaya should be used to meet the
domestic requirements and can only be exported if such requirements were
met, SC 38 merely requires the contractors to supply a portion of domestic
requirements on a pro-rata basis.

SC 38 defined pro-rata as the total volume
of crude oil requirements for domestic consumption multiplied by the ratio
of total quantity of crude oil produced by Malampaya to the entire
Philippine production of crude oil.

Except for natural gas which supplies the
three power plants in Batangas, the country has yet to utilize for
domestic consumption the condensate and crude oil that have been extracted
from Malampaya. From 2001 to 2004, Malampaya has produced around 9.9
million barrels of condensate, which have all been exported to Singapore
for refining because local refineries owned by Pilipinas Shell and Petron
Corporation could not supposedly process its components.

Condensate is a lighter type of crude that
can be refined into gasoline, diesel, and kerosene. In addition, all the
1.9 million barrels of crude oil produced between December 2001 and April
2002 during the extended well test were also exported to a Chevron Texaco
refinery in South Korea.

Crude oil gone to waste?

Worse, amid increasing world crude prices
that have been hurting the national economy, SPEX and Chevron Texaco did
not only export Malampaya oil and condensate but also adamantly refuse to
develop the Malampaya oil rim which is a potential domestic source of
crude oil for the Philippines.

Estimates of the quantity of crude oil
stored in Malampaya vary. SPEX and Chevron Texaco put it at 18-32 million
barrels while the DOE claims that the Malampaya crude oil reserves range
from 28-40 million barrels. On the other hand, the Energy Information
Administration (EIA) of the US Department of Energy, in its online country
analysis brief on the Philippines wrote that Malampaya crude oil could
reach as high as 85 million barrels.

SPEX and Chevron Texaco claim that the
potential quantity of crude oil in Malampaya is too small to develop and
have thus abandoned its earlier commitment to develop the oil rim for
commercial production. The government decided to look for other foreign
investors to develop the Malampaya oil rim while PNOC claimed it is ready
to take over the project if the government asked it to.

But SPEX and Chevron Texaco have
effectively disallowed the development of the Malampaya oil rim by asking
for US$12 billion, or six times the amount of their investment in the
upstream portion of Malampaya, in indemnity fund to be set up before the
government allows any third party to encroach in the development
initiatives for the proposed oil rim beneath the Malampaya gas field.

The indemnity fund, which is stipulated in
SC 38, is to 'guarantee compensation for any damage to the profitability
of the natural gas business,' according to the oil TNCs.

This issue has put into serious question
the supposed control and supervision of the government over Malampaya. For
the oil TNCs that operate the project, it is not profitable to develop the
oil rim (and besides they are already earning from the sale of natural gas
and condensate) while the issue is not merely profitability but national
interest especially in the light of sky-high global crude prices.

The amount of Malampaya crude oil may be
small relative to actual domestic requirements but compared with existing
oil fields in the Philippines, it is the most productive and must be
harnessed and maximized. To illustrate, Malampaya's five-month crude oil
production yielded an average of 385,965 barrels per month, which is 22
times the combined monthly average of the country's only existing oil
fields– Matinloc and Nido, also both in Palawan.

If Malampaya is under the full control and
supervision of the DOE as guaranteed by the Constitution, then the
government could have required the foreign operators of Malampaya to
supply the local market first before exporting any petroleum, as well as
develop for commercial production and domestic utilization all the
petroleum found in Malampaya.

But SC 38 does not only allow the
exportation of Malampaya petroleum but also contains a provision that
prevents the government from further developing and maximizing the
resources of Malampaya for the national interest. If not extracted as soon
as possible, experts warn that crude oil under the Malampaya gas field may
go to waste by 2008 or 2009 because the reservoir pressure will have been
depleted by that time from the existing gas production, thus preventing
commercial oil production.

Uphold people's ownership and control

Granting that the Philippine government
does not have the technological know-how and financial muscle to explore,
develop, and utilize by itself the country's petroleum resources, it is
still not an excuse to blindly enter into contracts that only abuse our
natural resources without due regard to the national and the people's
interest. Even if we allow the participation of foreign corporations, the
effective control over the natural gas or crude oil should still lies in
the hands of the State. Clearly, in spite of the constitutional guarantee
on the full State control and supervision of such resources, the Service
Contract system has in fact stripped off the government of such right and
obligation.

In the light of the raging oil price
crisis, the most urgent task of the government is the reconsideration of
the Malampaya Service Contract and all other petroleum Service Contracts
in the country. What the 1987 Constitution says is merely financial and
technical assistance from foreign corporations on large-scale exploration,
development, and utilization of petroleum resources, and nothing more. PD
87 violates this constitutional provision and must therefore be repealed.
A system that will uphold the people's ownership over the country's
resources and ensure effective State control, while maximizing foreign
technical and financial assistance must be enforced to replace the Service
Contract system. IBON Features/Posted by Bulatlat